The retirement annuity offers a steady payment of annuity income that can last through your lifetime and even the lifetime of your spouse, if you choose. However, along with low interest rates and the rising cost of living, retired people are sometimes afraid to place money into assets that produce a fixed income which can not keep up with their growing needs, i.e. the rising cost of living.
One option would be to acquire several smaller retirement annuities over a period of many years and hoping that some of those would be purchased at times when interest rates are higher. Say that you are a 75-year old guy and are considering putting $300,000 in a retirement annuity. With that investment, based on present rates, a good annuity company will possibly pay you $2,350 monthly for the rest of your life. But consider what could happen if you were to make three smaller immediate annuity purchases over 10 years, say $100,000 each.
At age 75 a new $100,000 immediate annuity might pay $783 monthly. Five years later, at age 80, you could purchase another $100,000 retirement annuity which provides $959 monthly income (your immediate annuity rate in the future is unknown right now so we will assume that the rates remain unchanged). Finally, at age 85 the last $100,000 would buy the retirement annuity with a $1235 annuity payment. The complete monthly income you could start receiving at 85 from the 3 annuities would be $2,977, $627 more than using a single large retirement annuity purchase initially.
These example assumes that interest rates continue to be constant throughout the 10-year period. The larger retirement annuity payments come about because the more advanced your age when purchasing a retirement annuity, the lower your life expectancy; which means the annuity company increases the monthly income. And if interest rates go up, the annuity payment could go upward still more since the insurer payouts on new retirement annuity would probably go up as well. Of course, the reverse could happen if interest rates decline. In the event that interest rates were to go down, new retirement annuity rates could fall and you may have recently been better off with the one-time large investment.
Obviously, by opting for several individual purchases, you get to choose the right time for it to make an investment in retirement annuity so that you can wait until the interest rate environment will be most favorable. And of course, you get the advantage of increased age and larger payments.
There's not a simple means to fix assuring that your nest egg lasts your lifetime, while at the same time getting your income keep pace with the escalating cost of living. But a prudent use of retirement annuity which supplies a lifetime income ould be a cornerstone of a sound retirement program.
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